Drafting Enforceable Commercially Reasonable Efforts Clauses in Business Agreements

Description

The pandemic and related matters upended the business world, imposing challenges and delays on companies and their workforces. Many commercial contracts contain provisions requiring one party to consistently pursue best efforts, commercial best efforts, commercially reasonable efforts, or some other "efforts" qualification. COVID-19's impact highlights the burden of these clauses on businesses trying to meet contractual obligations in a difficult economy.

Both sides of an M&A transaction must use best or commercially reasonable efforts to close a deal. Parties closing during the COVID-19 crisis should actively communicate with each other about their operations as closing approaches. If the COVID crisis places the deal in jeopardy, parties should investigate and document its impact on their ability or obligation to close.

Earn-out transactions oblige an acquirer to operate the acquired company consistent with best or commercially reasonable efforts to protect the seller's earn-out rights. Acquirers should explore and document any strategic changes that might trigger a claim under an efforts clause, including those that are industry-wide or market-based.

Licensing and other commercial agreements often require the developing or commercializing party to continue with commercially reasonable or other efforts. Counsel can track recent development and commercialization efforts of similar products to decide whether a party is using reasonable efforts.

Several states with direct ties to major sales and commercial agreements view these obligations differently. Counsel must understand state obligations that may affect a deal. Delaware courts impose a duty on the party subject to the efforts clause to work with its counterparty to resolve problems. New York, Massachusetts, and California courts focus more on the reasonableness of a party's actions, explicitly acknowledging that a party may consider its own interests in complying with efforts duties.

Listen as our expert panel discusses building "best efforts" clauses in future commercial agreements and handling a default if one arises during the COVID-19 pandemic and beyond.